Posted by admin on November 25th, 2011 | 2 comments
On 11 July 2011, Real Gold Mining Limited (00246.HK) was removed from Hang Seng Composite Index, Hang Seng
Composite SmallCap Index, and Hang Seng Composite Industry Index – Materials.
There was a hint in the announcement from Hang Seng Index Services on June 29th: Real Gold Mining Limited “has been suspended from trading and has not yet resumed”.
Hong Kong media already had their suspicions about Real Gold after it was involved in manipulation of stock prices, financial fraud and frequent personnel changes.
The significance of the problem is not only limited to these reported problems. I work as an investigative reporter for the China Economic Times and have found through field investigations and interviews that there is no sign of operation and production in the core assets of Real Gold, and many of these assets have deal-breaker problems according to several local government departments who stated that there are a number of issues such as a very low ore grade/tenor, expired licenses and incomplete formal procedures, etc. Two of the five clients mentioned in the prospectus said that “we absolutely do not and have not ever had any business relationship with Real Gold”.
Has Real Gold been blatantly fraudulent?
The plot thickened in July with Real Gold, already suspended from trading, having further claims made against them.
China Economic Times received an anonymous tip that three of Real Gold’s gold mines never actually went into production since day one, and all financial data during the period when the company was public was faked. Meanwhile, Wu Ruilin, the actual holder of the company controls several other listed companies, behind which there is a complete chain of forgery and fraud, “their aim is simply to expropriate money through fraud”.
As early as in 1999, Cosun Telephone Company owned by Cosun Group controlled by Wu Ruilin went public on Nasdaq; in 2007, Cosun Mobile Company, which is wholly owned by Consun Telephone Compnay went public on the NYSE, through which CECT became the first domestic [Chinese] mobile phone company to go public on the NYSE.
Real Gold went public in Hong Kong on 23 February 2009, raising more than seven hundred million Hong Kong dollars. Disclosed material indicates that the company is engaged in gold mining and processing of ore and other minerals. Statistics show that the gold profit is the main source of the overall profit for this company: it accounted for 89% in 2007, 71% in 2008, 66.1% in 2009 and 64.1% in 2010. The main source of revenue is three gold mines located in Chifeng Municipality in Inner Mongolia, namely the Shirengou Gold Mine, the Nantaizi Gold Mine and the Luotuochang Gold Mine. Besides Inner Mongolia, Cosun Group also aspires to build a mining enterprise covering Xinjiang, Guangxi, Yunan and Jiangxi, conducting exploration and development of mineral resources such as gold, nonferrous metals, coal, etc.
In order to see what’s really going on, this journalist went to Chifeng Municipality in Inner Mongolian Autonomous Region for investigation.
Nantaizi Gold Mine
50 tons? 300 tons? 1,480 tons? There are different versions of ore processing capability for this mine depending on who you ask.
Are they stealing ore? Are there sales contracts? Large-scale production or small scale? Is this even a real operation? There are differing arguments for all of these cases.
It is the morning of the 18th of July and I’m at Shirengou village in Songshan District, Chifeng Municipality.
After an hour’s journey on substandard roads, yours truly finally arrived the Nantaizi Gold Mine located in Guan Cungou Village, Xiao Niuqun Town, Kalaqin, Chifeng Municipality.
Two women were separating ore, a small electric tricycle with full load of ore was parked alongside; In the work shed next to the mine entrance, there were several workers who were busy with the logistics of the mine, a “supervisor” sat by the side. This was the first scene of the Nantaizi Gold Mine that came into the journalist’s view.
“We are contractors at the mine so we need to pay the mine every year.” the site administrator told me, produced ore is processed by the contractors instead of being processed in the nearby separation plant. The ore is owned by them and has nothing to do with the company, they simply pay the mine for the right to extract and process the ore.
Further down the road, I found the ore dressing plant owned by Real Gold, where there was only a bulldozer working on an area the size of half a football pitch and nobody else was present. In the living quarters I saw only a few workers came to the dining hall for lunch.
According to the 2009 annual report of the company, the ore processing capacity of the facilities at Nantaizi Gold Mine was 900 tons [a day] from January 2009 to October 2009. From November, the capability increased to 1,480 tons per day. The annual volume of processed ore is 351,500 tons.
If this is really the case, then why does the scene I am presented with here seem quite different? Relevant government departments have their own opinions.
In the afternoon on 19 July, Kang Xiangxin, chief of the mines safety supervision and management bureau at Kalaqin told me the following: “There are two systems at the Nantaizi Gold Mine, one has been put into production while the other one is under construction. The production system is Nantaizi Gold Mine located in Guan Cungou Village with a mine safety license; the one under construction is Li Shugou Gold Mine, this mine does not have a mine safety license.”
“All mining must be equipped with an appropriate sized separation plant and tailings reservoir.” A group leader called Kang from the same department told me. “The two systems at Nantaizi Gold Mine share one tailings reservoir, the designed capability of which ranges from 100 tons to 300 tons. The processing capacity should be fairly close. The processing capability of the separation plant is definitely bigger than 100 tons and smaller than 500 tons.”
He told me that any production at the other mine, where there is no current mine safety license, cannot be regarded as legal production. Extraction systems have not been completed, and the tailings reservoir has not been accepted, which means that the mine is not legally able to produce any ore.
From the data obtained from the environmental impact report on Nantaizi Gold, this dressing plant can process 90,000 tons of ore, in other words, 300 tons each day.
The informant working with us doubts the authenticity of the appraiser for the environmental impact report, “the signature on the report has been copied from some other place by the company”. When I asked the Environmental Protection Bureau of Chifeng Municipality they denied this assertion, “it is unlikely that the company forged the signature.”
When I asked whether the company is currently producing, Kang said that “the operation of the mine is not in the jurisdiction of the mines safety department”.
“The daily dressing capability of this ore separation plant is merely 50 tons” the informant told me, “the few people you see here actually just came here to steal the ore. The company is not currently in production”, there is no formal production of ore, and there are no workers in the ore separation plant.
Shirengou Gold Mine
“There has not actually been much mining over the last two years” the environmental Protection Department said, “It is in production, but the daily production of ore is about 166 tons per day”. The overall output of gold reported to the lands department was 107,800 ounces in total, and increased by 18% than that of 2009- 2010 according to the annual report
The prospectus indicates that Shirengou Gold Mine and Nantaizi Gold Mine are adjacent to each other. Actually, Shirengou Gold Mine is located in Songshan district, Chifeng Municipality, but shares a separation plant together with Nantaizi Gold Mine.
In the afternoon on 18 July, I went to the Nantaizi Gold Mine again by taxi and wanted to learn the situation in Shirengou Gold Mine indirectly.
The visit in the morning might have caused extra vigilance of the mine personnel; the gate of Nantaizi Gold Mine was closed. When I tried to talk with the doorkeeper, someone came out and took a picture of the license plate of the taxi and my face. I went back to Chifeng Municipality. I have been followed everywhere I go since then, even when I asked the police for an escort, but I pursued.
“There is an ore dressing plant and tailings reservoir, however, the equipment is fairly old. The processing capability of the dressing plant is 100 tons per day” Wang, Director of Songshan district branch of the environmental protection bureau told me. However, director Wang indicated that he didn’t know in detail what the capacity of the tailings reservoir is, “There has not actually been much mining activity for the last two years. What can I tell you? They are prospecting all the time and they are taking a terribly long time dragging it out”
On 19th July, I noticed that the registered capital of Shirengou Gold Mine was 600,000 RMB in the Industry and Commerce Bureau of Songshan district in Chifeng Municipality. It was established on 10th Nov 2004, with approved date of 26th October 2009. Director Tian of this Bureau told me that the company has done the annual renewal.
In the afternoon on 22nd of July, Mr. Li, mining management team leader at Land and Resources Bureau (Songshan Branch) told me that Shirengou Gold Mine is under production, with an annual production output of 60,000 tons, that is 166 tons of mined ores per day.
Real Gold’s Annual Report in 2010 indicated that the company has earned a profit of 1.37 billion Yuan, with a year-on-year increase of 35%; gross profit increased by 41% to 1.06 billion yuan with a gross profit rate of 77%; overall output of gold produced by Shirengou-Nantaizi totaled about 107,800 ounces, with an increase of 18% than that in 2009, gold produced by Luotuochang Gold Mine totaled about 28,300 ounces, with an increase of 11% than that of 2009.
Luotuochang Gold Mine
Local governmental departments have different ideas about this mine’s performance.
“The mine hasn’t been operating for several years due to poor grade of the ore.” as stated by the Environmental Administration.
“[Legally] the mine should have been [but hasn't been] producing gold since day 1 when the license was approved.” according to the local Administration of Mine Safety.
The annual report published in 2009 [by Real Gold] claimed it’s a different story. The report said that Luotuochang Gold Mine’s production capacity had increased to about 1,100 tons per day, and that the total amount of processed ore was around 288,400 tons that year.
Our reporters launched their investigation from Chifeng city, Inner Mongolia, to find out what the real story is.
On the morning of July 21st, it was raining heavily. After driving through the winding hills, with the help from a company insider, our reporters finally arrived at Luotuochang village in Balinzuo Qi, where one of Real Gold’s mines, Luotuochang Gold Mine, is located.
Two rows of lightly constructed brick houses and several other facilities, which were placed randomly around the pitheads, were visible at the mine. It was deathly quiet when the reporters arrived.
The insider quipped: “Even if the mine is still in operation, where’s the ore? Where are the processing facilities? And even if the ore exists, how is it being transported?”
Yesterday afternoon, Wang Xueyong, the chief of Balinzuo Qi Bureau of Land and Resources’ Mine Management unit, told reporters that Luotuochang Gold Mine had been out of operation for several years because of a lack of production, and there was only one guard working for the mine. He also said: “What the company does once in a while is to spruce up the mining area a bit.” On the same afternoon, Hu, Balinzuo Qi Bureau of Environmental Protection’s Chief, told reporters that the mine had been closed for 2 years, since 2010. He wasn’t sure about the situation before 2010 because he wasn’t working for the bureau then. Hu agrees that the reason for the mine being shut is because of a lack of production [unable to produce enough gold to be economically viable].
Chief Wang of Balinzuo Qi Bureau of Mine Safety told reporters: “I recall that Luotuochang mine does currently have an operating license, so it can be mined. Licenses are available to mines that are legal and safe.”
But what the company provided to the public is totally different information.
The 2009 Annual Report states that the daily quantity of desirable ore that Luotuochang Gold Mine was able to separate out was about 800 tons. The figure rose to 1100 tons in October. The total quantity of processed ore for the year was 288,400 tons. Gold output for the year was around 116,800 ounces, and the equivalent gold output was around 177,200 ounces. The average selling price for gold was 839.6 USD per ounce throughout the year. If the mine was closed for 2 years, where did these exuberant figures come from?
In Real Gold Mining Limited Company’s prospectus, the two rows of brick bungalows, mentioned earlier, were described as an industrial complex. The complex covered 2,668,000 square meters, and was said to have several well-equipped buildings, which were finished in 2008. The buildings included one research center, one tailings dam, one crude ore bin, and one fine ore bin. The supporting facilities included a boiler house and a bore-water-production house. In the prospectus, total expenses for the mine in 2008 was 47.74 million RMB.
Our insider told us: “These are obviously false claims and were made to exaggerate the company’s outlook before it went public.”
Being shocked at how the gold mine actually looked, people started to have doubts about the all 3 mines. The form below includes the licenses, permits and legal documents that Real Gold Mining Limited claimed in the prospectus.
The environmental protection license for all 3 gold mines have expired. Both Nantaizi Gold Mine’s production and business licenses have expired. Luotuochang Gold Mine’s mining permit has expired. Also, the safety production permit is about to expire. Ironically, all the representatives from relevant governmental branches for the city said that the company had valid licenses as well as legal documents.
One thing that is also confusing is the efforts that Inner Mongolia’s Bureau of Land and Resources are taking to renew Luotuochang Gold Mine’s related licenses. They are ignoring the facts that the mine has been closed for a long time and the mining license has been expired for 5 months. In order to renew Luotuochang mine’s mining license, the Bureau of Land and Resources in Chifeng City commissioned Inner Mongolian Kerui Assets Appraisal to evaluate the mine’s assets, and created the document “No.013 Appraisal by Inner Mongolian Kerui Assets Appraisal Limited 2010“.
The conclusion of the evaluation was that until November 30th 2010, Luotuochang Gold Mine’s partial assets, amounted to 242,300 RMB. The report was supposed to be carefully produced by the appraisal company, who is required to follow the national codes of practice, and use appropriate evaluation methods and indexes.
Why bother renewing the mining license if the mines are no longer in operation? Wang, the Mine Management Unit’s chief for the Balinzuo Qi Bureau of Land and Resources, replied that it was because the company paid for the mineral resource compensation fee.
A Real Gold staffer explained to reporters that in order to renew the license, the company needed to hand in 242,300 RMB to the Bureau of Land and Resources and report to the Bureau that the mine’s deposits will allow for a higher level of production than is actually possible. This provides a perfect opportunity for the company to lie to investors concerning the levels of their gold reserves.
Similar cases happen regularly in government environmental protection and water conservancy departments too.
The Real Gold Mining Limited Company Prospectus said that up till December 31st 2008, the cost of environmental protection for the year was 1.743 million RMB. The prospectus also projected the cost to be 8.9 million RMB and 10.9 million RMB in 2009 and 2010, respectively. However, the environmental protection bureau for the city wouldn’t acknowledge these figures.
The unpublished material recorded by Chifeng Water Conservancy Department indicated that Luotuochang Gold Mine would have to pay another 4.1811 million RMB. This would cover the cost of conserving topsoil and water for mining and processing. The standard was set to be 150 tons per day. Also, the Water Conservancy Department would get another 8.3644 million RMB from Nantaizi Gold Mine for soil and water conservation at the standard of 300 tons per day. But the department would not confirm the figures.
A local insider told reporters: “All the supervisory departments are getting what they want. So none of the departments are willing to investigate. That’s the reason why Real Gold wasn’t questioned.”
Who is responsible?
Aside from the supervising departments, some geological exploration and mining consultancies are also to blame for this scandal. The irresponsible behavior of mining consultancies had an even worse effect [than the government departments].
The Independent Technical Report (ITR) was produced by Behre Dolbear Asia, an international mining consultancy group. The report states that Shirengou Gold Mine and Nantaizi Gold Mine hired Liaoning Geological Exploration Institute to explore the two mines in August 2006. The exploration reports of the two deposits were submitted in September 2007. The reports had an updated estimate about the mineral resources. In October 2006, Real Gold Mining Limited Company bought Luotuochang Gold Mine from a personal proprietor, and hired Liaoning Geological Exploration Institute again to do two surveys. One survey was started in August 2006, and ended in June 2007. The other survey was started in July 2007, and ended in September 2007.
The Independent Technical Report indicated that the Liaoning Geological Exploration Institute calculated the mining assets for the three gold mines on July 31st 2007.
After the Liaoning Geological Exploration Institute was finished, Chifeng Shengyuan Geological Exploration Limited produced another 3 detailed exploration reports for Real Gold.
“Yes, we did the reports. We received the information from the mines around 2008, and started exploring the deposits afterwards. We also went to the sites to confirm information such as proven reserves and roadways. The result showed that most data in the original reports was correct. After revising the original reports, we had them reviewed and recorded. They were reviewed by the experts [Behre Dolbear], and recorded by the Department of Land Resource in Inner Mongolia Autonomous Region.” according to Mr. Wang, a manager at Chifeng Shengyuan Geological Exploration Limited.
Insiders have a different take: “Real Gold hired two companies to do geological reports for the same mines. The intention behind this was to increase the reserves by substituting real data with fake data.”
The insider had more to say: “The reports would be revised dozens of times to create fake information, but laymen investors wouldn’t be able to detect the fraud because of the technicality inherent in the subject. Chifeng Shengyuan revised the detailed report for Shirengou Gold Mine, but they won’t give you the original one that they made changes to. You would have to go to the Record Office in Inner Mongolia’s Department of Land and Resources to search for it and find out that it wasn’t even recorded.”
Mr. Wang denied the reporters request to see the detailed reports that his company made.
It is well known that mining consultancies are usually not allowed to go to the real mine sites that they are hired to do reporting on. Mining companies would take them to other mining sites instead.
Tip of the iceberg
Real Gold no longer operates [these mines]; but its [reported] business performance [for these mines] is improving rapidly.
Real Gold’s annual reports said that sales revenue of the 3 mines was 312 million RMB in 2008; 1.011 billion RMB in 2009; 1.368 billion RMB in 2010. The annual reports also explained that profit growth in 2008 should be attributed to the investment that was made in Nantaizi Gold Mine and Luotuochang Gold Mine, which boosted sales. Profit growth in 2009 should be attributed to the additional construction in Nantaizi Gold Mine and Luotuochang Gold Mine. The company’s net profit in the first quarter 2011 was 178 million RMB, which increased 39.7% year to year.
The company attributed the amazing business performance to investment and additional construction, but this is absolutely contrary to what the reporters witnessed during the investigations.
Although the company did mention a temporary stay of operations for no longer than 25 days starting from June 18th, reporters found that in the 2010 annual report, neither Nantaizi nor Luotuochang were mentioned. In 2008 and 2009 annual reports, both gold mines were described in detail. The reporters also found questionable information concerning the company’s 5 major clients, who were mentioned in the prospectus. The 5 major clients were Liaoning Xindu Gold Limited Company, Henan Yuguang Gold and Lead Limited (600531), Chifeng Kumbahongye Zinc Limited Company, Chifeng Baiyinnuo’er Lead and Zinc Factory and Chifeng Fubang Copper Limited.
The fact that no specific sales volumes regarding these clients were revealed in the annual reports raised a red flag. The more ironic thing is that when we called up Liaoning Xindu Gold Limited Company and Henan Yuguang Gold and Lead Limited Company to confirm their business relationships with Real Gold Mining Limited Company, they were out rightly told that no business relationships exist. Only Chifeng Fubang Copper Limited Company states they are a customer.
“All the data including the financial statements were fabricated.” a local insider leaked to reporters: “The relationships with 4 out of the 5 major clients were counterfeit. Think about it, they didn’t have real clients to do business with. Where did they get the contracts, receipts, and transaction records from banks? They were all fake.”
Current employees at Real Gold told reporters that the company indeed had some problems, but they didn’t clarify what the problems were.
This is how Wu Ruilin, the owner of Real Gold, operates. Could this just be the tip of the iceberg?
Original produced by the China Economic Times, Translated into English by Transeam Mining Translation.